Markets position ahead of Powell’s Jackson Hole speech

The US dollar rebounded against all but one of its major peers on Thursday, with the only exception being the British pound.

With no clear catalyst behind the greenback’s recovery, it seems that investors may have begun liquidating their short dollar positions ahead of Fed Chair Powell’s testimony, despite yesterday’s data pointing to increasing jobless claims last week.

In the absence of any development corroborating the case for a 50bps interest rate reduction in September, market participants may have decided to adopt a more realistic approach, as there is nothing suggesting that, at his Jackson Hole speech today, Fed Chair Powell will signal aggressive rate cuts for the upcoming gatherings.

Having said that though, the probability of a double rate cut in September did not drop to zero. It was just reduced to 25%, with the number of total basis points worth of reductions by the end of the year now standing at 97.

This means that there is room for more adjustment if Powell appears less dovish than expected, even if he reiterates the view that the door to a September cut remains open. After all, yesterday, some Fed members lined up in support of a September cut , and still, the dollar gained. It seems that with Wednesday’s Fed minutes revealing that some officials wanted to cut interest rates in July, clear signals about a September move do not constitute a surprise anymore.

Sterling was the only major currency that resisted the dollar’s recovery, and this may have been due to the UK’s better-than-expected preliminary PMIs for August. Yet, traders are penciling in around a 27% probability for a back-to-back rate cut by the BoE on September 19.

The yen, although a loser yesterday, staged a recovery today on BoJ Governor Ueda’s remarks in his first appearance before the Japanese parliament. Although the BoJ Chief warned that financial markets remain unstable, he reaffirmed his determination to continue raising rates if inflation stays on course to hit the Bank’s objective.

His remarks may have discouraged those who wanted one last ride with the previously overcrowded carry trade, in which, due to Japan’s ultra-low interest rates, the yen was used as a funding source for investing in higher-yielding assets.

Thursday was a red day on Wall Street, with the candlestick chart of the S&P 500 suggesting a bearish engulfing pattern. If the technical analysis formation is confirmed by today’s trading activity, equity traders may start next week with some apprehension.

Yesterday’s slide was driven by declines in technology shares, perhaps due to the readjustment of the market’s Fed implied rate path. Thus, a less-dovish-than-expected appearance by Powell today may be the catalyst for another red day and the confirmation of a short-term reversal.

Gold was also sold off yesterday due to the dollar’s rebound and the rise in Treasury yields. The precious metal lost more than 1% and could lose more today after Powell’s remarks, but in the bigger picture, it remains in uptrend mode.